PSU Banking Stocks Surge to Fresh Record Highs Amid Market Volatility
Following their standout performance in 2025, Public Sector Undertaking (PSU) banking stocks have sustained a robust upward trend in 2026, with investors maintaining a positive outlook on the sector. This optimism has propelled a majority of these stocks to scale new record highs, even as the broader market experiences significant fluctuations and instability.
Strong Fundamentals Underpin the Sustained Rally
The rally is fundamentally supported by exceptionally strong December quarter earnings, which have been bolstered by an acceleration in system-wide credit growth, a notable recovery in margins, and substantial improvements in asset quality across the board. Although the Union Budget 2027's announcement of a higher borrowing plan for the upcoming fiscal year initially triggered panic selling earlier this month, PSU banking stocks demonstrated remarkable resilience by staging a powerful and swift comeback.
In today's trading session on February 12, the benchmark Nifty PSU Bank index soared to another unprecedented all-time high of 9,294 points. This milestone has driven the index's year-to-date returns to an impressive 8%, highlighting the sector's outperformance in a challenging market environment.
Top Performers Deliver Double-Digit Returns Year-to-Date
Among individual stocks, State Bank of India (SBI) shares continued their upward trajectory for the second consecutive session, reaching a historic peak of ₹1,203.70 per share. This rally has catapulted SBI's stock by 22% in 2026 so far, pushing its market capitalisation beyond the monumental ₹12 lakh crore threshold. Consequently, SBI has now ascended to become the fourth most-valued listed company in the entire Indian stock market, surpassing major competitors.
Union Bank of India has also delivered outstanding performance, achieving a double-digit return of 16.7% in 2026, with its stock touching a record high of ₹183 per share earlier this month. Similarly, Bank of India has surged by 14.22%, while other key constituents of the Nifty PSU Bank index, such as Bank of Maharashtra and Indian Bank, have posted gains of 7% and 6%, respectively, during the same period.
Policy Support and Economic Factors Fuel Growth
The Reserve Bank of India has played a pivotal role by implementing a cumulative reduction of 125 basis points in the key policy rate through December. Complementing these repo rate cuts, the rationalisation of GST and earlier reductions in income tax have significantly supported credit growth within the financial system during the third quarter. These measures prompted SBI to revise its FY26 credit growth guidance upward to 13–15%, from the previous range of 12–14%.
Furthermore, the RBI's recently released biannual Financial Stability Report indicates encouraging trends in headline asset quality metrics across India's financial sector, reinforcing confidence in the stability and health of PSU banks.
Expert Analysis on Future Prospects and Risks
Anil Rego, founder and fund manager at Right Horizons PMS, provided insights into the sector's outlook. He noted that the higher-than-expected FY27 gross borrowing programme is likely to maintain firm government bond yields in the near term, potentially raising the risk of mark-to-market (MTM) pressure on banks' treasury portfolios.
Rego explained that with yields projected to increase gradually throughout the year due to elevated borrowing needs and a reduced probability of further rate cuts, valuation losses on held-for-trading and available-for-sale books could become more pronounced. This is particularly relevant for institutions holding a larger proportion of government securities outside the held-to-maturity (HTM) category.
However, Rego emphasised that strong core operating performance, driven by steady credit growth and disciplined cost control, can still support overall profitability through FY27. This makes the earnings narrative more resilient than bond market movements alone might suggest. He added that the impact will be uneven across PSU banks, with those that built substantial HTM cushions being relatively insulated, as securities in this category are not subject to daily MTM fluctuations.
Rego concluded by stating that any stress is more likely to be related to earnings timing rather than structural issues. "Stronger core credit growth and improving margins can offset treasury swings over the full year, though reported profits in individual quarters may appear more volatile if bond yields remain elevated," he further elaborated.
Disclaimer: Investors are advised to consult with certified experts before making any investment decisions.
